Bend Law Group, PChttp://www.bendlawoffice.com
Legal Advice. Strategy. Solutions.Thu, 17 Nov 2016 16:54:48 +0000en-UShourly1https://wordpress.org/?v=4.6.1Marijuana Is Legal! But Business Is Not?http://www.bendlawoffice.com/2016/11/17/marijuana-is-legal-but-business-is-not/
Thu, 17 Nov 2016 16:53:19 +0000http://www.bendlawoffice.com/?p=2925Marijuana Is Legal! But Business Is Not? How to Build Your Recreational Cannabis Brand Before Your License to Sell Is Issued Written by: Rachel Davey Last Tuesday, Californians voted YES on Proposition 64 to legalize recreational use of cannabis for adults, ages 21 and over. Massachusetts and Nevada also approved recreational marijuana, and many... Read More

How to Build Your Recreational Cannabis Brand Before Your License to Sell Is Issued

Written by: Rachel Davey

Last Tuesday, Californians voted YES on Proposition 64 to legalize recreational use of cannabis for adults, ages 21 and over. Massachusetts and Nevada also approved recreational marijuana, and many other states took strides toward complete legalization. While Prop. 64’s passage was a certain victory for prospective non-medical cannabis retailers, they will have to wait to jump into business.

Immediate Changes

Adults over 21 have new rights. They may possess or transport (up to 1 oz.), grow (up to 6 plants, inside home), and use recreational marijuana (in private).

There could be a year-long gap before selling non-medical marijuana is legal. State-issued licenses are required to sell and have yet to be issued.

The Administration. The new “Bureau of Marijuana Control” will usurp the previous “Bureau of Medical Marijuana Regulation.” It will promulgate and enforce planting, licensing, distribution, and sales rules consistent with Prop. 64.

Regulatory Overload- Tempered. 64 states that rules and regulations should not be “unreasonably impracticable” and they must be “based on best available evidence” and mandate only “commercially feasible procedures.”

“Gifting” Medical Marijuana to Non-Medical Users. If “gifting” transactions are discovered, responsible medical dispensaries could be shut down, or barred from obtaining a state license to sell non-medical cannabis in the future.

Selling Marijuana Without a License Can Result in a Misdemeanor Charge with Up to 6 Months in Jail and $500 in Fines.

Changes by January 1, 2018.

Licenses to Sell Issued; Business Begins. 64 only allows non-medical marijuana to be sold by state licensed businesses. Growing, processing, or transporting marijuana for sale also requires this license. The state must begin issuing sales licenses for recreational retailers no later than January 1, 2018.

Cannabis Tax. State commercial cultivation and retail excise taxes take effect. Cities and Counties may vote to adopt additional taxes.

The Federal and State Divide: Trademarking Cannabis Goods and Services

There is still a federal and state divide. Federal law will continue to designate marijuana as an illegal drug. And as an illegal drug, cannabis and its related goods and services are not “trademarkable” subject matter that can form the basis of a federal trademark application in the United States Patent and Trademark Office (USPTO).

However, in California, where recreational marijuana is now legal, applicants may file California trademark applications with the Secretary of State. But there is one caveat: California requires “actual use” of the word mark or logo to file a trademark application, rather than the USPTO requirement of “good faith intention to use [within 6 months]” in commerce.

For prospective recreational cannabis sellers, this might seem like impasse: non-medical marijuana names and logos can’t be trademarked until used in commerce, and they can’t be used in commerce until the state issues a retailer a license to sell—which might begin to happen in January 2018. However, waiting to take action in selecting your mark could be fatal to developing your brand.

Before falling in love with, or investing any start up capital into, a brand name for your non-medical marijuana shop, you should think deeply about your chosen name. Not only must you be the “first to use” the mark in conjunction with some goods or services, but also the name itself must have sufficient trademark strength, to be eligible for protection. There are three different levels of “strength” as to some word mark in conjunction with some goods or services:

Inherently Distinctive. These words are the strongest, and are automatically eligible for protection. These words are often arbitrary or fanciful. For example: “Fat Cow” computers is arbitrary, but “Fat Cow” ice cream is not, because it is descriptive of the product. And the word “Google” for a search engine is fanciful.

A descriptive word can only be protected if it becomes distinctive of the Applicant’s goods or services—that is, a substantial segment of the buying population associates the name with its source. The words themselves describe the qualities or characteristics of a good or service (for example, “Park’N Fly” as a service mark for an airport parking and shuttle bus service), describes a geographic location, or is a surname.

Generic words have no power and are not registerable. These words are the generic words for the goods or services they to which they attach. For example, “Car Wash” for a car wash business is generic. One recently-generic term you might be familiar with is “Xerox” for copy machines. The consuming public referred to copying as “Xeroxing” so uniformly, that the mark lost its power. Consumers no longer identified “Xerox” as the source of the copying machine; the term was used ubiquitously to describe copy machines of all brands.

Potential recreational cannabis retailers should seek out trademark guidance specific to their company’s needs early, in order to select a mark that has not been taken and is eligible for trademark protection, so that they can start building their brands as soon as they are licensed to do so by the state.

If you are in the cannabis industry and are looking to prepare for the effects of Proposition 64, we are happy to help you navigate the new waters. Please give us a call at (650) 271-9395 or email us at info@blgtrademarks.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

]]>The Importance of Website Privacy Policies in Californiahttp://www.bendlawoffice.com/2016/11/14/the-importance-of-website-privacy-policies-in-california/
Mon, 14 Nov 2016 20:28:21 +0000http://www.bendlawoffice.com/?p=2922As companies increasingly include an online presence, or are only located online, a common question is: do I really need a privacy policy? Unless you are operating a non-interactive website, such as a blog that has no way for users to enter any information, the answer in California is nearly always “definitely.” Who needs a... Read More

]]>As companies increasingly include an online presence, or are only located online, a common question is: do I really need a privacy policy? Unless you are operating a non-interactive website, such as a blog that has no way for users to enter any information, the answer in California is nearly always “definitely.”

Who needs a privacy policy

Under the California Online Privacy Protection Act of 2003, any operator of a commercial website, mobile application, or online service that collects “personally identifiable information” from its users is required to post a privacy policy on its site and comply with that policy. “Personally identifiable information” means any individually identifiable information about a user, and includes data such as a user’s name, address, email-address, telephone number, social security number, and any other identifiers that permit the user to be contacted physically or online. This means that if a site is collecting payment information from users it absolutely needs to have a privacy policy, but even if a site is only collecting email addresses to add users to an email list, this still requires a privacy policy.

Privacy policy requirements

In order for a privacy policy to be compliant with the law, it must:

Identify the categories of personally identifiable information that the website collects;

Identify the third-party persons or entities with whom the operator may share the collected personally identifiable information;

Describe how users can review and request changes to their personally identifiable information;

Describe how users are notified of changes to the operator’s privacy policy for the website;

Identify the effective date of the privacy policy;

Disclose how the operator responds to web browser “do not track” signals; and

Be conspicuously posted on the operator’s website.

Moreover, if a site or online service is directed to children under age 13 or collects information about children under age 13, the Children’s Online Privacy Protection Rule imposes additional notice and consent requirements.

Consequences of not having a privacy policy

A website that does not have a privacy policy that collects personally identifiable information from users is in violation of the law, and therefore could be prosecuted by the government. Additionally, the California Attorney General’s Office recently released a new online form that allows website users to report sites that do not have privacy policies or whose policies do not comply with the legal requirements, which should increase the likelihood that violators will be penalized.

Not only does the privacy policy need to comply with the legal requirements, but the website owner must comply with the procedures and disclosures listed in its policy and update the policy if its procedures change. A site operator’s failure to comply with the policy could bring rise to a lawsuit by a user, and users can also report these types of violations to the Attorney General’s Office.

Conclusion

A well-drafted privacy policy not only ensures that the online company is complying with the law, but it also protects users and site owners by providing a greater level of understanding regarding how users’ information may be shared and updated. Additionally, all online companies should strongly consider posting Terms of Use on their site to make sure that they are adequately informing users about their policies and protecting themselves from potential lawsuits or intellectual property infringement.

Bend Law Group can assist online companies, including mobile application developers, by drafting privacy policies and terms of use that accurately describe the company’s practices and comply with the legal requirements. If you would like to talk more about your online legal needs or have any questions, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

]]>The Four Layers Of Defense For Your Small Businesshttp://www.bendlawoffice.com/2016/10/20/the-four-layers-of-defense-for-your-small-business/
Thu, 20 Oct 2016 16:34:08 +0000http://www.bendlawoffice.com/?p=2917By: Doug Bend & Ambere St. Denis This first appeared on Forbes. Our firm has counseled hundreds of business owners. But the ones who sleep best at night are those who have made strategic legal and insurance investments to protect their business and personal assets. That’s why we recommend the following four layers of defense... Read More

Our firm has counseled hundreds of business owners. But the ones who sleep best at night are those who have made strategic legal and insurance investments to protect their business and personal assets. That’s why we recommend the following four layers of defense for small business owners:

1. Exceptional Customer Service

It’s hard to overstate the amount of litigation that could be avoided by great customer service. The saying “penny wise and pound foolish” is never more true than when it comes to a customer potentially suing you for negligence. All it takes is for an unhappy customer to complain to an attorney at a cocktail mixer who responds, “You should sue!”

The least expensive legal defense you will ever pay is apologizing and comping a product if a client is unhappy. If a customer was harmed at your business, apologize and be quick to fix whatever might have caused the injury,and err on the side of reimbursing the customer’s reasonable, documented expenses.

By doing so you will not only prevent potential lawsuits, but you might turn what could have been a 1-star Yelp review into a 5-star review.

2. A Solid Contract

Not every dispute can be solved with an apology or a free product or service. If that first line of defense fails, it’s important to have a solid contract in place that plans ahead. Think of it as a chess game for worst-case scenarios. This way, you’re able to tell customers, “We’re sorry you’re still unhappy, but Section 17 of our services agreement clearly provides that our liability is limited to X amount.”

3. Business Insurance

Even if there is a solid contract in place, there may be a lawsuit over whether the contract is enforceable or if the contract covers what occurred. A solid insurance policy can help cover the costs of the litigation, and if you lose the lawsuit, the damages.

Be sure to know what the insurance policy covers and what it doesn’t. Many mistakes occur when a business believes they have coverage when they actually don’t. They’re only left to find out after a potential claim has been brought to their attention.

4. A Legal Entity

A properly formed and maintained legal entity can serve as a crucial last line of defense to help protect your personal assets from your business activities. If a customer isn’t satisfied with your apology and your contract and insurance don’t cover the claim, a legal entity can serve as a final backstop to prevent the customer from going after your personal assets. Consult with a business attorney and your CPA about the best type of legal entity for your business, as there isn’t a one-size-fits-all legal entity choice.

The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.

]]>Determining Ownership from Restaurant Investmenthttp://www.bendlawoffice.com/2016/08/26/determining-ownership-from-restaurant-investment/
Fri, 26 Aug 2016 00:23:52 +0000http://www.bendlawoffice.com/?p=2907Determining the right investment terms for a new restaurant is a balance between the restaurant managers retaining the amount of control and payout that they need to run the restaurant that they are envisioning, and the investors receiving a percentage of the restaurant that they think is fair for the amount of money that they... Read More

]]>Determining the right investment terms for a new restaurant is a balance between the restaurant managers retaining the amount of control and payout that they need to run the restaurant that they are envisioning, and the investors receiving a percentage of the restaurant that they think is fair for the amount of money that they are investing. Deciding on the membership interest amounts that achieve these goals can be tricky during the planning stages of the new venture, and the information below provides some considerations for determining these amounts.

Investing in an existing company is much easier to calculate than a brand new company, because the existing company has a determinable value and so the ownership that is purchased with a certain investment amount can be merely a matter of doing the math (i.e. if an existing restaurant is worth $2M and an investor puts in $500,000, the investor could receive 20% of the restaurant). Making an investment in a brand new restaurant is less straightforward, however, because it’s difficult to put a value on something that doesn’t exist, especially when there are so many variables to a restaurant’s success, from location to price point to surrounding locations to service style.

Therefore, in order to determine the amount of interest in a new restaurant that an investor will receive, the managers should consider:

How much of the restaurant ownership they want to retain for themselves (generally at least a majority, usually 60-70%);

How much of the restaurant ownership they want to sell to investors and if any equity will be set aside for service provides;

Approximately how many investors will be involved;

Where the investor is located, and whether or not they meet the definition of an Accredited Investor for purposes of federal and state securities compliance;

The amount of investment money that the managers are seeking and a clear business plan detailing exactly why this exact amount of funds is needed (often described in detail within a private placement memorandum); and

What requests or demands, if any, the managers have already received from investors regarding ownership amounts.

Given the unique quality of most new restaurants, it is impossible to create a formula that says that if there are a certain number of investors and investment money, there is a specific amount of ownership that must be given. However, considering these factors and speaking with an attorney to discuss your options can help a new restaurant owner decide what to offer to investors for their early confidence in the new endeavor. The attorneys at Bend Law Group can help with these discussions and the related ownership documents and SEC filings. If you would like to talk more about raising investment money for a restaurant or have any questions, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

]]>California ABC Announces Annual New Liquor License Lottery!http://www.bendlawoffice.com/2016/08/19/california-abc-announces-annual-new-liquor-license-lottery/
Fri, 19 Aug 2016 20:58:57 +0000http://www.bendlawoffice.com/?p=2905The California ABC just announced the application period for new general liquor licenses, which gives restaurant and bar owners the very limited opportunity to purchase a new Type 47 or Type 48 license from the ABC. The general liquor license is the most coveted license, as it authorizes the sale of beer, wine, and distilled... Read More

]]>The California ABC just announced the application period for new general liquor licenses, which gives restaurant and bar owners the very limited opportunity to purchase a new Type 47 or Type 48 license from the ABC. The general liquor license is the most coveted license, as it authorizes the sale of beer, wine, and distilled spirits (as opposed to beer and wine-only licenses that are available year-round), yet the number of general licenses that the ABC can issue in a county is restricted by county population. If the maximum number of licenses has already been issued for the county, the only way to obtain a general license is to buy one from an existing licensee in the county, very often at a high premium. However, as a county’s population increases, the ABC authorizes new general licenses once per year during a priority application period by allowing the issuance of new licenses in the county and intercounty license transfers.

During the priority period, applicants can submit an application to obtain a new original general license in the county ($13,800 filing fee) or to transfer a license from anywhere in the state to the priority county ($6,000 filing fee). However, because the number of licenses in each county is restricted by population, only certain, growing counties are included in the priority application period and only for a specific number of the licenses.

The following Northern CA counties are eligible for new on-sale general licenses:

A full list of the counties eligible for new general licenses is here. Unfortunately San Francisco, Sonoma, Napa, and Marin counties do not have any new general licenses available.

If you are interested in applying for a new general license in one of the authorized counties, here are a few things to keep in mind:

• The application period is September 12 – September 23, 2016. If you miss it, that’s it until next year. 5pm on September 23, 2016 is the hard deadline.
• An applicant must be a resident for California for at least 90 days (which includes being incorporated in California if the applicant is an LLC or corporation) to be eligible.
• This is a lottery system. If the number of applicants is less than the number of licenses available (unlikely), everyone wins. If the number of applicants is more than the number of licenses available, a public drawing is held. Unsuccessful lottery applicants will be refunded their application fee, minus a $100 processing fee.
• Successful lottery applicants will have 90 days to complete a formal application for their specific premises (formal applications require proof of a 2-year right of tenancy at the applied-for premises).
• Licenses issued through the priority system are subject to unique transfer requirements and restrictions, so be aware of these prior to applying.

Bend Law Group assists restaurants and bars in the start-up process, including incorporation, investment strategies, and ABC and health permitting, plus compliance and contractual matters after opening. We can help you submit your priority application for a general license and then the formal application once (fingers crossed!) it is approved. Please contact us at info@bendlawoffice.com or 415-633-6841 for more information.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

]]>The Single Member LLC Taxed as an S Corporationhttp://www.bendlawoffice.com/2016/07/17/the-single-member-llc-taxed-as-an-s-corporation/
Sun, 17 Jul 2016 17:07:22 +0000http://www.bendlawoffice.com/?p=2878As a single member LLC your entity is considered a “disregarded entity” for federal tax purposes. That means that while you have the limited liability protection afforded an LLC, you’re taxed the same as if you were a sole proprietor in that all of the profits and losses flow down directly to you as an... Read More

]]>As a single member LLC your entity is considered a “disregarded entity” for federal tax purposes. That means that while you have the limited liability protection afforded an LLC, you’re taxed the same as if you were a sole proprietor in that all of the profits and losses flow down directly to you as an owner.

One potential downside to this structure is paying the self employment tax on the profits generated by the LLC. However, as the owner of a single member LLC you do have the option of making an S corporation tax election for your entity. Like a single member, or multi-member LLC, an S corporation is considered a pass through taxation structure.

So why consider the S corporation tax election if they both are pass through entities? The most common reason is to avoid self-employment taxes on the profits the entity generates.

By making an S corporation election the owner can now make themselves an employee of the entity, pay his/herself a reasonable salary (and take note that the IRS is serious that the salary must be reasonable), and take any other profits left over as a distribution. The distributions from an S corporation do not carry with it any employment related taxes, while in comparison all profits in the standard single member LLC setup carry with it self-employment taxes.

To elect S corporation tax status, you must file with the IRS form 2553. There are limitations for when the election can be made as it must be filed with 75 days of forming the company, or by March 15th to ensure it applies to the current year.

Aspects such as what you must set as a reasonable salary, when the s corporation election will apply, and the added administrative paperwork make filing the S corporation election a decision you definitely should run by your CPA, or another tax expert. Simply making the election to avoid self-employment taxes can be an endeavor you’ll later regret as it does not make sense for all single member LLC owners.

If you have questions about your single member LLC, please don’t hesitate to contact us at info@bendlawoffice.com, or at 415 633 6841.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

]]>The Friends and Family Investment Roundhttp://www.bendlawoffice.com/2016/07/07/the-friends-and-family-investment-round/
Thu, 07 Jul 2016 17:13:46 +0000http://www.bendlawoffice.com/?p=2875As the saying goes your network is your net worth, and for many startups that are just starting to raise capital friends and family is the best source of funding. However, securities laws both at the state and the federal level require a startup issuing securities to either register the offering with the SEC and... Read More

]]>As the saying goes your network is your net worth, and for many startups that are just starting to raise capital friends and family is the best source of funding. However, securities laws both at the state and the federal level require a startup issuing securities to either register the offering with the SEC and the state, or find an exemption that allows the startup to complete the offering without a great deal of regulatory compliance work.

The big hurdle with the friends and family round surrounds the idea of accredited investors. For many founders their network is full of contacts who believe in their vision, but do not fall into the definition of an accredited investor. To compound things further, many rules require increased disclosures, such as audited financials, if the startup will allow non-accredited investors into the round (see Rule 506). If a large chunk of friends and family round is chewed up with legal and accounting costs, the whole ordeal starts to become more of a hassle then it’s worth.

This post explores two viable options that allow a California company to raise capital from friends and family—some of which who are non-accredited investors— without the large burden of legal and accounting costs.

The two options we’ll analyze are Rule 504, and Rule 147 of the SEC, both of which require a California startup to also consider Section 25102(f) of the CA Securities Code.

Rule 504

Of the two ways Regulation D allows a company to accept investment from non-accredited investors, Rule 504 is the more practical. Rule 506 allows a startup to include up to 35 non-accredited investors, however, under Rule 506 if you include non-accredited investors you must provide the investors with the same information as is provided in a registered offering. This requirement generally makes it too costly to conduct a small raise from friends and family.

Under Rule 504, a startup can raise up to $1 million over a twelve month period, and you can accept investment from non-accredited investors without the same information disclosures required under 506. The two things to factor into a Rule 504 raise are:

Therefore, if an issuer relies on Rule 504 they must find a state securities exemption to keep the compliance cost at a minimum. For a CA startup this is where 25102(f) comes in.

CA Rule 25102(f)

Pursuant to 25102(f) a company can sell securities to an unlimited number of accredited investors and company executive, and up to 35 non-accredited investors, as long as the unaccredited investors satisfy one of the following stipulations:

The investor has a preexisting personal or business relationship with the company or its principals/founders; or

The investor has the ability to protect their interests due to their financial experience or the fact that they have experienced professional advisors.

Additionally, in order for the transaction to be compliant with 25102(f), all purchasers must state in writing that they are purchasing for their own account, the offering must not be advertised to the public, and you must file a 25102(f) exemption notice with the CA department of business oversight.

Speaking generally, the idea of a preexisting person and/or business relationship is to allow the investor to evaluate the character, experience and circumstances of the person with whom the relationship exists. As for financial experience, the rule is looking to see if the investor has previous experience investing in these types of offerings, and/or has experience operating or working with a similar venture.

For a first time startup it is all but imperative that the analysis of a pre-existing personal or business relationship and financial experience of the non-accredited investor be analyzed with the assistance of legal counsel. Unfortunately there is not a black and white rule for either, and the experience of a lawyer can go a long ways to protect the startup against downstream issues.

Intrastate Exception

The second federal exemption to consider (and remember, whenever you satisfy a federal exemption you must also consider state rules, such as 25102(f)) is the federal Intrastate Exemption. The federal Intrastate Exemption exempts “any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.”

The goal of this federal exemption is to allow an a company who is doing business primarily in the one state to offer securities to investors in the same state without extensive regulatory compliance. This safe harbor rule is intended to make it feasible for startups to complete an offering to accredited and non-accredited investors provided some key factors are met.

To comply with Rule 147 the CA company must satisfy the following**

The startup must be incorporated in CA and its principal office must be in CA

Eighty percent of the startup’s gross revenues and assets are in CA

The proceeds from the raise shall be used for services or property in CA

Cannot offer the securities to non-residents for a period of nine months from the date of last sale and for the nine-month period all resales must be to CA residents

Securities must contain a legend evidencing that the securities have not be registered under the Securities Act and setting forth other limitation of resale, transfer and written confirmation of the purchaser’s residence

**Rules discussed at a high level, a longer discussion with legal counsel is necessary to ensure compliance with all of the Intrastate rules.

Just like Rule 504, if the Federal Instrastate Exemption applies the startup must now consider state rules, and for CA Startups the rule generally relied upon is 25102(f) discussed above.

Conclusion

A key thing to consider is just because you can take money from friends and family members who are not accredited investors doesn’t mean you should. With all startups there is a high chance of failure. For the sake of your relationships, and for legal reasons it’s a good rule of thumb to only take investment from someone who can bear the risk of loss. For those investors in which the loss of their investment would be a significant hit to their savings the more likely it is to damage the relationship and potentially cause legal trouble (such as claiming fraud or misrepresentation).

Completing a friends and family raise can be critical to your success and also very exciting, but it’s not without its traps. You should always consult an attorney to ensure that you’re taking the right steps to set you up for success.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

]]>Restricted Stock and Rule 144http://www.bendlawoffice.com/2016/06/26/restricted-stock-and-rule-144/
Sun, 26 Jun 2016 19:15:49 +0000http://www.bendlawoffice.com/?p=2871Under the Securities Act of 1933, all offers and sales of securities must be registered with the Securities and Exchange Commission (SEC) unless an exemption applies. One of the conditions of the Regulation D safe harbor from SEC registration is that the issuer must take reasonable care to ensure the issued securities are not bought by... Read More

]]>Under the Securities Act of 1933, all offers and sales of securities must be registered with the Securities and Exchange Commission (SEC) unless an exemption applies. One of the conditions of the Regulation D safe harbor from SEC registration is that the issuer must take reasonable care to ensure the issued securities are not bought by Section 2(a)(11) underwriters. If a shareholder’s resale of stock is considered a “distribution,” the shareholder is considered an underwriter. Therefore, including a restrictive legend on securities helps establish that the issuer took reasonable care to comply with the conditions of Regulation D.

One way for a startup to put in place mechanisms to prevent its shareholder from reselling their securities in a way that would jeopardize the issuer’s original exemption from registration is a stock legend. Thus, when a security is initially issued in an unregistered transaction the company will typically include a restrictive legend on the security to:

Identify the restricted nature of the security;

Make clear the shareholder’s inability to freely resell; and

Demonstrate the company’s attempted compliance with the exemption requirements.

When it comes time for a holder of shares to consider selling, the same principle of finding a security exemption for an unregistered offering will apply and most holders rely on the safe harbor of Rule 144. If the shareholder resells its shares in accordance with Rule 144, the resale is considered exempt from registration under Rule 4(a)(1) of the Securities Act.

For questions about resales or ensuring that your offering is compliant as an unregistered offering, please contact us at info@bendlawoffice.com or 415 633 6841.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

]]>Attracting Talented Employeeshttp://www.bendlawoffice.com/2016/06/20/attracting-talented-employees/
Mon, 20 Jun 2016 19:23:13 +0000http://www.bendlawoffice.com/?p=2868It takes a lot of effort to attract talented individuals to join your team. To help ease the process it’s important to start at the beginning by evaluating what you’re offering compared to your competitors. Presenting an attractive opportunity is as much about the value package you can provide as it is about the work... Read More

]]>It takes a lot of effort to attract talented individuals to join your team. To help ease the process it’s important to start at the beginning by evaluating what you’re offering compared to your competitors. Presenting an attractive opportunity is as much about the value package you can provide as it is about the work and culture.

To help you think through some of these factors we’ve broken this post into two parts. Alex King of Bend Law Group will discuss equity compensation, and Mark Lutton of TriNet will bring it home with a brief discussion about Medical Benefits and the importance of implementing the right “strategy” for your company.

When you’re a startup, it’s important to not overlook the equity compensation aspect when filing the certificate of incorporation. Most businesses don’t grant stock options or seek venture capital as their options continue to grow and expand. However, because a startup will seek to scale and grow, we strongly encourage our clients to authorize 10,000,000 shares when they file the certificate of incorporation.

Now you may be saying, “but couldn’t we obtain the same results just sticking with 1,000?” You could! But unfortunately people (employees/consultants/directors) like to have a large number of stock even if the percentage of the company would be the same. 50,000 stock options sounds better than 5 even if they mean the same ownership percentage of the company, and we cannot discount ego and vanity when people are comparing an offer within their networks. Thus, a key aspect of the long-term planning involves compensating future service provisions through equity compensation.

When planning for the future you must also keep in mind that you cannot sell or give away stock unless the securities are either (i) registered with the SEC, or (ii) are issued pursuant to an exemption. Rule 701 is the federal securities law exemption for compensatory equity issuances.

When creating an equity compensation strategy, here are a few key components to consider:

(1) Disclosure Requirements: Rule 701 requires issuers to provide the service provider with a copy of the equity incentive plan.

(2) Understand How the Number of Shares Impacts Future Investment: Keep in mind when deciding how many shares to contribute to the plan that investors will calculate the share price on a fully diluted basis. For example, if the founders owned 6 million shares, and the equity incentive plan had 2 million, the investors would say the fully diluted the share structure was 8m, and not 6m, even if no one had received shares out of the equity incentive plan at the date of investment. Therefore, it’s very important to put only the amount of shares you forecast you’ll need to attract the talent necessary to fulfill key roles.

(3) What type of Grant Makes Sense for the Company: An equity incentive plan that authorizes multiple types of awards will permit greater downstream flexibility, even if the company only intends one type of grant at the time of creation.

Here’s a quick breakdown of the two primary awards:

Stock Options: A stock option gives the holder the right to purchase shares at a fixed exercise price over a specified period of time. The award may either be an incentive stock option (often referred to as an “ISO”), which can only be granted to employees, or a nonqualified stock option, which is commonly used with consultants and advisors.

Restricted Stock: Restricted stock is a grant of equity that remains subject to forfeiture until an applicable vesting schedule lapses.

The key difference is that a grant of restricted stock is immediately taxable (unless the service provider pays for the shares) and the service provider may vote and receive distributions on the shares even though they may be subject to vesting.

Furthermore, stock options may or may not be deferred compensation subject to Section 409A of the Internal Revenue Code. The analysis depends heavily on if the option was granted at or above fair market value, and the consequences for failing to comply with 409A are severe. Of Internal Revenue Code Section 409A’s three approved valuations, the two that are most pertinent are (1) independent appraisal, which is done by a professional firm experienced in valuation methods, or (2) a company that has been in existence less than 10 years and does not reasonably anticipate an IPO (or acquisition) in the next 180 days can rely on a valuation performed using Section 409A’s enumerated valuation factors by a person (can be a company employee) with significant knowledge and experience or training performing similar valuations.

What this brief discussion highlights is the importance of following both the SEC and IRS rules for equity compensation. Crafting a proper plan so that you are capable of granting proper equity compensation that competes or exceeds your competitors can be one of the key factors for why a candidate chooses you.

As Alex stated, it absolutely takes a lot of effort to attract talented individuals here in the Bay Area and even more to retain them. So how do Medical Benefits play a role in this?

I would submit to any company the answer is all in your company’s “strategy” behind your Medical Benefits offering.

I meet with start-ups on a weekly basis in an effort to help them navigate through all the complexities of having “a” employee, let alone 5 to 100 employees here in the wonderful Bay Area. A question I always start my meetings with when it comes to benefits is this:

“Do you offer medical benefits?”… Sounds like a crazy question to most because what qualified and talented candidate is going to accept an offer from a company that doesn’t offer benefits, right?

So why do I ask this question?

I ask this question because 95% of the time the answer is “yes, of course we offer medical benefits.” That then leads me into my follow-up question, which will always be…. “Why do you offer Medical Benefits?”

A company’s response to this very basic question and the subsequent discussion it leads to will give me more insight on how I can help them than almost any other discussion we will have.

Allow me to explain.

The 5%:

If I am meeting with the owner(s) of one of these companies and they tell me “We don’t offer medical benefits because we don’t care” (and trust me this happens) I typically will end the meeting because at the end of the day if you don’t care about your employees, then I don’t want to do business with you and I can’t “help” a company at that point. Furthermore, I feel bad for your employees. I digress…

The 95%:

Over the years I have heard a multitude of responses as to why a company offers Medical Benefits. From “because we legally have to offer them” to “my employees are my most valuable part of my business so I take care of them” and everything in between.

But what is right reason for offering Medical Benefits?

In my opinion it is important to understand the “right” reason for offering medical benefits will be unique to each company. However, the “strategy” behind the Medical Benefit Offering is where the focus needs to be.

As a start-up it is imperative that you understand that the power lies in the implementation of your “strategy.” When my team and I work with companies we have to always look at the dynamics of the company. We evaluate the demographics (is it primarily millennials, baby boomers, a blend, etc.), we look at the culture and how it plays into the business as a whole, and from there we begin building and then implementing the “strategy.”

For anyone who has ever had to look or “shop” all the different medical carriers here in California and all the different types of plans and offerings each carrier has, it is overwhelming to say the least. There are literally thousands of plans and a plethora of providers.

That being said, when putting together your “strategy” you will have to understand the following in great detail:

1) The Company Contribution:
First figure out your company’s contribution strategy. How much of the premium are you going to pay? 100% of the premium for the employee and their family? 100% for the employee and 50% for their family? 50% for the employee and nothing for their family? Something I believe is crucial for any company venturing to do this without outside help is KNOW WHAT YOUR COMPETITION IS OFFERING. That piece of information will be your building block for your “strategy.”

Why is that?

Because it is important to understand that just because your competition offers 85% or 100% medical benefits contribution that doesn’t mean the plans they offer make any sense to the talent they are seeking. Your competition could be throwing money out the window because they have a flawed strategy!

For instance, the millennial candidate you may be seeking does not need nor want to pay anything for what a 30-year-old to 50-year-old with a family will require. So paying for that premium for your millennial hire with a 100% contribution from you is bleeding your capital for no reason.

A high deductible plan that costs very little to the company and nothing to the employee per month means a lot to a young professional who may or may not even go to an annual check-up. Don’t underestimate the power of your contribution “strategy.”

2) The Plan Design(s):

When discussing plan designs, given all the carriers and plans available, know that as a small group (new start-up/under 100 employees) your options are expensive and limited with or without a broker (unless you partner with a Professional Employer Organization). So be smart and educated when you choose the plans.

Choose plans that make sense for your company’s culture.

If you are going to hire millennials you probably don’t need to bother with any “Gold” type plans. The high deductible plan mentioned above will absolutely suffice and you can contribute 100% because it will cost you much less and the talent you seek will feel that you are taking great care of them by offering them “free” Medical Benefits.

Please keep in mind this is a very high-level overview of the Medical Benefits “Strategy” but I am hoping that my point will hit home: Know why you are offering Medical Benefits and use your “strategy” to your advantage. Make your “strategy” work for you and make it a tool for attracting the talent you seek. Don’t just let your Medical Benefits offering be your second largest expense—get an ROI on your Medical Benefits by implementing the right “strategy”!

Disclaimer: This article discusses general legal issues, but it does not constitute legal or tax advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, and TriNet expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this article.

]]>Tips & Tricks For Naming Your California Corporationhttp://www.bendlawoffice.com/2016/06/03/tips-tricks-for-naming-your-california-corporation/
Fri, 03 Jun 2016 17:20:47 +0000http://www.bendlawoffice.com/?p=2859When forming a corporation in California, it is important to keep in mind the rules that the California Secretary Of State’s Office uses when reviewing formation filings. You should also look ahead two or three moves ahead, like a chess match, and consider what the U.S. Patent & Trademark Office will consider when reviewing a... Read More

]]>When forming a corporation in California, it is important to keep in mind the rules that the California Secretary Of State’s Office uses when reviewing formation filings.

You should also look ahead two or three moves ahead, like a chess match, and consider what the U.S. Patent & Trademark Office will consider when reviewing a trademark application to protect the name of your business.

Naming Rules When Forming A California Corporation

The California Secretary Of State’s Office has a few quirky rules for naming your California corporation. Some of the most frequent reasons a filing gets rejected include:

1. Geographic Designation

For purposes of running a conflict check when approving the articles of incorporation, the Secretary Of State’s Office drops geographic designations of the names of places.

For example, when reviewing a filing to create California Sushi Bar Inc. the word California would be dropped when evaluating the name and the filing would be rejected if there already was a Sushi Bar Inc. registered with the California Secretary Of State’s Office. Similarly, a filing for America Sushi Bar Inc. would also be dropped as America is also the name of a place.

In contrast, Californian, unlike California, would not be dropped and so Californian Sushi Bar Inc. could be approved as Californian is not the name of a place. In addition, American, unlike America, would not be dropped and so American Sushi Bar Inc. could be approved.

To further complicate the geographic designation rule, it only applies to California corporations and not to LLCs.

2. Numbers

In doing its name conflict analysis, the California Secretary Of State’s Office also drops numbers.

For example, 10 Hot Wings Inc. would be rejected if there already was a Hot Wings Inc. registered with the California Secretary Of State’s Office.

3. “Scream Words”

The Secretary Of State’s Office also has a list of what it describes as “scream words” that will cause a filing to be rejected.

For example, if you file articles of incorporation to form Californian Sushi Bar LLC Inc. the filing will be rejected as it has the scream word of LLC in a filing to create a corporation.

4. Names Of Other Entities

Finally, the California Secretary Of State’s Office has separate databases for corporations, LLCs and LLPs and so it could approve a filing to form a corporation with the same core name of an existing LLC.

That being said, you should also consider trademark law to make sure your company name does not get you in legal hot water.

Trademark Law

You can read more here, but long story short you also need to take into consideration trademark law when naming your company.

A trademark is a recognizable word, phrase, design, or expression which identifies the source of a good or service. Registering your trademark on the U.S. Patent and Trademark Office’s (USPTO) federal registry provides you with a legal presumption that you are the rightful owner of that mark nation-wide. This means that if you file a claim for trademark infringement based on a federally registered mark, the burden is on the other party to prove they were not infringing.

The two most frequent reasons a trademark application gets rejected are:

1. Likelihood of Confusion

The question of whether another mark presents a conflict to your trademark’s registration is one that is difficult to assess. The test for trademark infringement is “likelihood of confusion.” This is not a quantitative test, and there is no set rubric for which to score or grade your risk. Instead the USPTO looks at several factors and weighs the totality of the situation, with the most important factors being (a) the relation between the goods or services; (b) whether the goods or services compete; and (c) the similarity of the marks in terms of their appearance, meaning and sound.

2. Merely Descriptive

Another common objection that the USPTO cites against a trademark application is that the mark is “merely descriptive” of the goods and/or services with which it is associated. The USPTO is hesitant to provide trademark protection to descriptive aspects of a trademark, in part because of the belief that one party should not have a monopoly over a widely used word or phrase.

You can learn more about how Bend Law Group helps businesses with their trademarks and brands at the Bend Law Group Trademarks website, www.blgtrademarks.com. Please don’t hesitate to contact us at tucker@bendlawoffice.com or (415) 633-6841.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction. Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.